Developments and Prospects for Islamic Finance in Italy

Abstract

Since the establishment of the first Islamic retail bank in the UK, in 2004, several European countries have developed a regulatory and fiscal treatment for Sharıʿa-compliant financial products and services. Italy formally joined this trend in 2010, when the Bank of Italy issued the first guidelines aimed at comparing Islamic finance with the conventional financial and banking system.

This chapter provides an analysis of the current knowledge and highlights the uncertainties with regard to the accommodation of Islamic finance in Italy. Although there are no major regulatory barriers, and already there is a wide range of financial instruments which could easily be adapted to the scope and objectives of Islamic finance, some issues, such as limited political support for specific fiscal adjustments and poor technical expertise, still prevent the full integration of Islamic finance into the national market. On the other hand, the evidence arising from the analysis of the individual initiatives of market players and the legal framework showed that a number of Italian contracts and investment mechanisms could facilitate the implementation of Islamic finance for the benefits of national Small and Medium Enterprises (SMEs) and financial inclusion.

The research suggests that the analysis of the complementarity between ethical banking and Sharıʿa-compliant investments is worthy of further research. Despite the divergent operating standards and parameters, the case study of socially responsible investment discloses unsuspected commonalities regarding concept and vision of values-oriented financial systems. Best practices of cooperative and ethical banking are likely to help establish a level playing field for Islamic finance in Italy by pointing out the compatibility of financial transactions which pursue similar socio-economic goals while maintaining different operational backgrounds.

Appendix

Interview (March 18, 2016) with Mr. Giuseppe Mansur Baudo, CO.RE.IS—Italy.

• Q: In your opinion, what are the prospects for Islamic banking and finance in Italy?

• A: ‘I point out two main prospects for Islamic banking and finance within the Italian market: mutual funds investing in Sharīʿa-compliant activities and microcredit loans with no interest rates. On the contrary, it may be more difficult to establish an Islamic retail bank, unless the major banking groups take some action in this direction. In this case, however, the risk is that these initiatives target all immigrants, rather than the Muslim community in particular. Therefore, they would foster the integration of migrants in general but they do not specifically aim to implement Islamic banking and finance in Italy. Moreover, there is a number of projects with high potential in Italy. For example, launching investment funds, based on the structure of ṣukūk muḍāraba, for the purpose of maintenance and improvements of major Italian sites of cultural and artistic importance. Additionally, creating Sharīʿa-compliant private investments facilities to which foreign companies could contribute through consortiums’.

• Q: In your opinion, what are the reasons behind Italy’s delay in accommodating Islamic banking and finance, unlike other European countries?

• A: ‘I would say that there are various institutional, cultural and social reasons. First of all, the local market is still immature due to the shortage of qualified stakeholders both within the Italian Muslim community and the institutional class. As for the Muslim community, those who would be qualified to interact with the institutional class and advance the interests of the Muslims disengage from the local community. At the same time, there is a double-edged cultural policy rooted in national religious sensitivities in Italy. On the one hand, religious sensitivity encourages effective forms of dialogue and interaction between the Catholic, Jewish and Muslim communities. On the other hand, the sporadic and unregulated presence of Muslims in Italy over the past seven centuries has deprived the Italian society of the knowledge of Islam. In addition, the Catholic majority has sought the integration of Muslim migrants in the form of full integration into national and European socio-economic structures. Nonetheless, the new native community of Italian Muslims will be able to establish new balances and forms of dialogue with institutions and society, in order to dispel the mutual stereotypes and preconceptions.

• As far as institutions are concerned, the Bank of Italy launched a department for the study of Islamic finance under the direction of Mr. Giorgio Gomel. Furthermore, various initiatives by ABI, the home office, law firms and the Chamber of Commerce in Milan have increased the awareness of Islamic finance through papers, conferences and training courses, for example. However, just a few of them suggested concrete solutions to implement Islamic banking and finance in Italy. I mention the seminar organized by the IFSB and hosted by the Bank of Italy in Rome in April 2013. Among the issues that could inhibit the development of Islamic finance in Italy, they identified the role of the Sharīʿa Board. In fact, the bank’s management decisions are typically entrusted to a single board. Therefore, the forum discussed ways in which to allow the interaction between two supervisory bodies.

• In this respect, CO.RE.IS devised the project of an external Sharīʿa Board, composed of Muslims as well as non-Muslims and supervised by the Bank of Italy, which may certify the compliance of products within conventional banks with Sharīʿa on a voluntary basis. This soft approach could be easily accepted by national authorities and implemented through ḥalāl Italia. The only downside would be that if the products become non-compliant over a period of the time, these may lose their right to certification but continue to be marketed to the detriment of the credibility of the whole Islamic financial sector.

• Finally, in light of the reasons stated earlier, I think that we should proceed by taking small steps to allow Islamic finance to integrate into Italian fabric, especially considering that the recession has had a negative impact on business initiatives in Italy’.

• Q: Do you find any common ground between Islamic finance and conventional ethical finance and how do you think it could affect the prospects for Islamic banking and finance in Italy?

• A: ‘We must definitely overcome prejudices and consider how Islamic finance could be embedded in ethical finance, given that both converge in the so-called alternative finance. We lean toward further integration in favor of the common good, much more than Gulf countries that have adopted a restrictive approach. Certainly, both financial systems could fall within the same regulatory framework. Nevertheless, we also need to preserve the distinctive features of Islamic finance. I mean that what is ethical is not necessarily Sharīʿa-compliant, e.g. investing in the wine industry. In fact, the rationale behind Islamic investments lies on religious principles, which are distinct from ethical reasons. What is more, the certification of Sharīʿa-compliance has to keep the distinction between what is lawful and unlawful clear and guarantee transparence about each aspect of transactions, though it may refer to the same regulatory framework as ethical finance. In short, we support the interaction between Islamic and ethical finance, provided that unambiguous information about ethical and Islamic criteria are supplied to the market’.

• Q: What steps CO.RE.IS has taken to implement Islamic finance in Italy?

• A: ‘We have a Sharīʿa Board that is an Ethical Committee with the aim of spreading the knowledge about Islamic principles and rules among institutions, private companies and banks. Among our initiatives, we responded to the Pope’s appeal to all people of good will in the encyclical “Caritas in Veritate”, through an official document intended to create synergies between the three monotheistic religions on the common themes of brotherhood, civil society and economic development. We participated in international forums on Islamic finance as well as the Italian festival of the Church’s social teachings. We held training courses for the BCC and we contributed to projects that are still in their embryonic stages for devising Sharīʿa-compliant loans at the request of banking groups. What is more, Imam Yahya Pallavicini is the chairman of the Supreme Council for Education, Science and Culture for Muslims outside the Islamic world, within ISESCO, under the umbrella of the Organization of Islamic Cooperation. This organization allows us to keep a close eye on the cultural initiatives of Muslim communities and on the dialogue between civilizations in the West, notably in Europe’.

Glossary of Selected Foreign Words

associazione in partecipazione

Type of joint venture where an entrepreneur has a partnership with associate(s) who undertake to carry out an activity for the company and have the right to obtain a share of the company’s profits as remuneration. Likewise, associates take partial responsibility for the business risk.

cinque per mille

Literally: five for a thousand. It is a fiscal measure that allows taxpayers to allocate a share of their personal income taxation to organizations dealing with activities performed in the public interest. It is free of charge for citizens, though it is not considered as a donation.

Ḥadīth (plural: aḥādīth)

A saying, deed, or endorsement of the Prophet (PBUH) narrated and transmitted by his Companions.

ḥalāl and ḥarām

Things or activities that are permitted and prohibited by Sharīʿa, respectively.

̕ijāra

Leasing; the sale of usufruct of an asset.

istiṣnā˓

A contract whereby a manufacturer agrees to produce and deliver a pre-determined product at a given price on a given date in the future. Unlike salam, the payment is not made in advance—the parties may agree on the payment method.

maṣlaḥa

Literally, public interest. It refers to any action taken to protect the public interest and common good. It can be used as a secondary legal source to establish legal rules or issue juridical opinions.

muḍāraba

A contract whereby a financier, rab al-māl, and an investment manager, muḍārib, enter into a partnership. Profit is distributed in accordance with the ratio upon which both parties agree at the time of the contract, while loss is borne only by the financier.

murābaḥa

Sale at a specified profit margin or markup. It refers to a sale agreement whereby the seller purchases the good(s) on behalf of the buyer and then sells them at an agreed marked-up price, which includes the cost of the risk borne by the seller as long as it holds ownership of the good(s). Delivery to the buyer and the payment method are settled within an agreed time frame.

mushāraka

A partnership agreement or joint venture according to which all partners participate in the management as well as the provision of capital and share in the profit and loss. Profits are distributed between the partners in accordance with the ratios initially set, whereas loss is distributed in proportion to each partner’s share in the capital.

organismo di investimento collettivo del risparmio

Category of financial intermediaries offering collective asset management services. These services include the promotion, establishment, and organization of mutual funds and the management of relations with the participants.

organizzazione non lucrativa di utilità sociale

Private entity, with or without legal personality, which carries out no-profit activities with the exclusive purpose of social solidarity. It must operate in one of the sectors identified in the legislative act 460/4 December 1997, and it cannot carry out activities other than those indicated in its statute. Profits have to be used for the implementation of planned activities and cannot be distributed between its members.

Qur’ān

The Holy Book of Islam, consisting of the revelations made by God to the Prophet (PBUH).

ribā

Literally, increase, addition, or growth. Technically, it refers to the compensation that the borrower must pay to the lender along with the principal amount as a condition for the loan or an extension in its maturity. Nowadays, it is understood as interest or usury, since any form of interest is deemed to be usury in accordance with Sharīʿa.

salam

a sale in which payment is made in advance by the buyer, and the delivery of the good is deferred by the seller.

Sharīʿa

The corpus of Islamic Law; the path of conduct based on Divine guidance as given by Qur’ān and Sunna. It embodies all aspects of the Islamic faith and way of life.

Sharikat al-‘aqd

Joint commercial enterprise effected by a mutual contract.

ṣukūk

(singular: ṣakk): these are Islamic investment certificates backed by real underlying assets relating to specific projects or investment activities. Ṣukūk provide their holders with undivided shares in the ownership of the underlying asset(s), along with the commensurate cash flows and risk.

Sunna

It refers to the Prophet’s (PBUH) example as indicated by his practice of the faith. The only way to know Sunna is through the collection of aḥādīth.

Takāful

The Islamic form of insurance based on the principles of mutual support and solidarity. A group of persons agree to share a certain risk by regularly donating a pre-determined sum to a Takāful operator. In the case of loss to any of the group, the loss is met from the collected funds. At the same time, a part of the contributions to the Takāful pool is earmarked for an investment fund that the operator’s shareholders manage on behalf of the policyholders. The latter are joint investors with the insurance company, and they share in the investment pool’s profits, in addition to benefiting from any cash surplus or dividends.

valori mobiliari

Transferable and negotiable securities issued by public bodies or private companies, which represent interest-bearing cash liabilities (return in a form of fixed payments) and interest-bearing shares invested in companies (variable returns), respectively. Since the entry into force of the Law on Finance, in 1998, valori mobiliari are called financial instruments and encompass bonds, shares of mutual funds, warrants, options, futures, swaps, securities traded in the money market, and others.

versamento in conto capitale

Contribution to the equity capital of a company, through a special-purpose reserve, with no obligation to repay.

zakāt

The compulsory charity due from every Muslim on his/her net worth, as a part of his/her religious obligations, mainly for the benefit of the poor and the needy. It is a duty on every adult Muslim who owns more than a certain threshold of wealth.